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How Big Is the Large Satellite Launch Market?

By Rich Smith – Feb 10, 2020 at 7:32AM

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Once you take out the government, it's a whole lot smaller than you might think.

The U.S. government plans to launch some 34 "national security payloads" into orbit aboard heavy lift rockets in the next few years (from 2022 through 2026). To do that, it's going to need to find a few good rockets to launch 'em -- and Boeing (BA 3.65%), Lockheed Martin (LMT 0.11%), Northrop Grumman (NOC 1.67%), SpaceX, and Blue Origin have all offered to help.

Not out of the goodness of their hearts, though. These launch contracts will be worth billions of dollars of revenue to the winners.

The plan is currently to pick just two companies to conduct all these launches (freezing the other bidders out). But to check its thinking on this point, the U.S. Air Force recently asked the RAND Corp. think tank to consider whether it might be advisable to hire a third launch provider to keep around as a backup option.

Four rockets racing to the sky

Image source: Getty Images.

Be prepared

As it turns out, RAND thinks that having a third potential rocket launcher waiting in the wings would be a good idea. That way, you get price competition from the get-go, ensuring the lowest bids between the two companies awarded contracts. You also lower the government's overhead costs, because it doesn't have to design payloads to fit aboard more than just a couple different kinds of rocket models.

And, if for some reason one of the two selected companies' rockets aren't ready in time to begin launching when the government needs them (or if one of their rockets suffers a mishap that prevents it from flying), the third company could be tapped to step in and fill the gap.

Thus RAND generally backed the Air Force's idea of awarding only two contracts to the four rocket companies competing to launch under its "Phase 2 Launch Service Procurement" program (Boeing and Lockheed are bidding as a team through their joint venture United Launch Alliance), while arguing it would also be nice to keep a third competitor around at least until 2023, to make sure the prime contractors' rockets fly right. 

The trick will be finding a way to make this happen.

Staying in business in space is hard

You've probably heard the popular quip "space is hard." (It usually starts popping up all over Twitter right after someone's rocket has blown up.) It turns out one of the hardest things about space may be making a buck off this business.

As RAND notes in its report, from 1998 through 2018 the total number of rockets launching annually has grown by about 50%. However, the number of launches put up for bid (i.e. not just immediately handed to a "national champion" space company for launch in a sole-source contract without competition) has remained basically flat at just 20 launches per year. That's 20 launches that must be divvied up among United Launch Alliance, Northrop, SpaceX, and maybe Blue Origin too -- and Roscosmos, Ariane, China's several launch companies, and India's ISRO besides. That works out to about one or two launches per company per year on average.

Suffice it to say that's not a lot to build a business on. And it gets worse.

American launch companies -- SpaceX especially -- are currently top o' the heap globally in winning work on launch contracts that compete on price. But RAND warns that the competition for such biddable launch contracts will get even fiercer in years to come. By 2025, RAND predicts there could be as few as four to seven actual commercial contracts that U.S. space companies will have a chance of bidding on, and winning, annually. Government-sponsored launches will provide the bulk of the business -- about a dozen launches per year between the Air Force and NASA combined. But anyone locked out of those government contracts may find there's simply not enough commercial work left to do to keep a business alive.

Granted, these predictions primarily concern the launch market for very large "heavy lift" rockets such as those SpaceX and ULA specialize in (and Blue Origin and Northrop want to begin building). The market for small and medium rocket launches, RAND says, should be quite a bit healthier -- but that's small comfort for companies already focused on the high end of the market.

Investors who may be betting on these companies to grow could be extremely surprised to find the market shrinking -- and should probably be refocusing their own efforts on finding the new leaders in small launch instead.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Boeing Company Stock Quote
The Boeing Company
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Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
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Northrop Grumman Corporation Stock Quote
Northrop Grumman Corporation
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